Electricity Market Watch

Sector research is one of the key directions of Galt & Taggart Research. We currently provide coverage of Energy, Healthcare, Tourism, Agriculture, Wine, and Real Estate sectors in Georgia. As part of our energy sector coverage, we produce a monthly Electricity Market Watch, adapted here for Georgia Today’s readers. Previous reports on the sector can be found on Galt & Taggart’s website - gtresearch.ge.

Electricity consumption in 2017

Domestic consumption increased 7.7% y/y in 2017 and reached 11.9TWh. Consumption by distribution companies increased 7.1% y/y and accounted for 71.1% of domestic consumption. Telasi subscriber usage (+5.2% y/y) accounted for a third of distributor demand, while Energo-Pro Georgia and former Kakheti Energy Distribution consumption (+8.1% y/y) accounted for the rest. Electricity usage of eligible consumers increased 18.1% y/y, despite the fact that two companies (Rustavi Steel Corporation and Georgian Railway) gave up this status in 2017. Consumption of the Abkhazian region increased 3.9% y/y and accounted for 16.9% of domestic consumption. Exports increased 22.7% y/y and reached 0.7TWh in 2017. Electricity transit through Georgia declined considerably (-70.1% y/y) to 254.0GWh, of which 80.7% went from Azerbaijan to Turkey, 16.6% from Russia to Armenia, and the rest from Russia to Turkey.

Electricity Supply in 2017

Domestic generation remained relatively constant in 2017. Deregulated HPPs posted a 20.3% y/y increase, due to the addition of new HPPs to the group, and accounted for 12.0% of total supply to the grid. Enguri/Vardnili generation increased 1.3% y/y, despite the temporary closure for tunnel works in February, and accounted for 32.7% of total electricity supply. 46.1% of Enguri/Vardnili electricity was used to supply the Abkhazian region. Generation by other regulated HPPs (26.0% of total supply), down 11.4% y/y, was the main drag on hydro output (-1.3% y/y) in 2017. Hydro generation did increase 6.7% y/y May through August, which was the main driver of export growth in 2017 (+22.7% y/y). The 20.6MW wind power plant generated 0.09TWh of electricity in its first full year of operation and accounted for 0.7% of total supply to the grid.

Growth in demand was met by electricity imports from Azerbaijan (61.3%), Russia (30.2%), and Armenia (8.5%). Electricity import in 2017 increased 3.1 times y/y from the low base in 2016 to 1.5TWh, or 11.5% of total electricity supplied to the grid. The reasons behind the dramatic increase were consumption growth in 2017 and lower hydro generation in the winter (-7.5% y/y), mainly due to Enguri’s maintenance works. Electricity import was chosen over additional generation by certain TPPs due to the flexibility of import, technical constraints, the insignificant difference in prices, and the necessity to have some thermal capacity reserved for system security. Total supply of electricity, comprised of domestic generation (11.5TWh) and import (1.5TWh), reached 13.0TWh (+8.1% y/y) in 2017. 91.0% of total supply was consumed by domestic consumers, 5.3% was exported, and 3.7% was used by power plants or lost during transmission.

2018 Forecast

Electricity consumption is expected to increase by 7.1% in 2018. According to the electricity (capacity) forecast of 2018, approved by the Ministry of Economy, the growth in consumption will be met by higher import (+30.8% y/y) and hydro generation (+7.3% y/y). Import sources will be determined during the year according to available commercial contracts. Thermal generation is expected to decrease 4.5% y/y in 2018. According to the forecast, only three small HPPs, with expected generation of 8.9GWh, will be added to the supply side in 2018. HPPs that were commissioned in 2017 will be the main source of the increase in hydro generation. Export of electricity is also expected to increase (+17.5% y/y). Export companies and directions will be determined through the auctions held by GSE during the year.

Electricity power purchase agreements (PPAs) eliminated

The government made changes to Decree 214, regulating the expression of interest process for HPP projects on the Ministry of Energy’s list. Currently, the list of potential power plants includes 98 small and medium HPPs with total approximate installed capacity of 1.5 GW. According to the change, these HPPs will no longer receive guaranteed PPAs from ESCO. In addition, the minimum pre-construction bank guarantee will increase from US$ 5,000 to US$ 15,000. The winner selection criterion (if several candidates bid for the same project) will be the amount of the bank guarantee the investor submits. Previously, the project was awarded to the bidder with the lowest PPA tariff in their proposal. The change will not affect MoUs that have already been signed. The Ministry of Economy did note that strategically important HPPs, such as those with seasonal regulations, might still receive guaranteed tariffs, as an exception, subject to detailed fiscal risk evaluation by the Ministry of Finance.

Telasi and Energo-Pro to invest GEL 85.6mn and GEL 343.5mn in grid rehabilitation over 2018-2022

Prior to setting new tariffs for distribution companies, GNERC approved not only the investment plans to be considered during tariff calculation (GEL 66.2mn and GEL 278.4mn, respectively, for 2017-2019), but also the grid development plan for the next five years. That plan includes the addition of new subscribers, rehabilitation of amortized transmission lines, construction of new substations, increase in transmission capacities, etc. Users currently connected to the 35-110kV transmission grid will be obligated to register as direct consumers in May 2018. Subsequently, they will no longer be subscribers of Telasi or Energo-Pro and will purchase electricity directly from suppliers at prices negotiated with the suppliers on a monthly basis. Direct consumers will pay all service fees to the respective service providers (2.393 tetri/kWh) and the guaranteed capacity fee to ESCO. This change will roughly double direct consumption.

Tariffs for water supply companies – GWP, Rustavi Water, and Mtskheta Water – increased by 22.0%

GNERC set the tariffs according to the methodology adopted in 2017, replicating the “incentive-based” methodology used for other utility businesses in Georgia. The tariffs are set to ensure an adequate return on the GEL 124.1mn to be invested by these companies over 2018-2020. Notably, the weighted average cost of capital (WACC), used as the pre-determined return on the regulatory asset base (RAB), is set at 15.99% for water supply activities. The new tariffs will be in effect for 2018-2020.